Tuesday, March 03, 2015, 4:39 p.m.

S&P investigation hampering plans for securities sale

Wall Street's plans to sell securities tied to more than $3 billion in commercial-property loans are being hampered by a regulatory investigation of Standard & Poor's, the biggest grader of such debt.

Bankers are rethinking whether to hire S&P to rate bond deals linked to real estate including the Mall of America, the nation's biggest shopping center in Bloomington, Minn., and the Atlantis resort in the Bahamas, according to two sources with knowledge of the discussions. Lenders are balking after S&P said last week it's facing U.S. Securities and Exchange Commission enforcement actions after an investigation of commercial-mortgage deals it rated in 2011, the sources said.

The investigation is threatening S&P's dominance in the market for commercial-mortgage backed securities tied to single borrowers, which surged to a record $25.3 billion last year. Lenders often seek out S&P's ratings on those transactions because they can squeeze more profit from their grading methodology than that of the second-largest ratings firm, Moody's Investors Service, according to Nomura Holdings Inc. bond analyst Lea Overby, who said banks now may be reluctant to hire S&P amid the regulatory scrutiny.

"There is too much uncertainty," said Overby, who is based in New York. "It's not totally clear whether or not S&P will be able to support these ratings in the future."

The firm will continue "serving the CMBS market for the long-term and providing market participants with high quality ratings and research," S&P spokesman April Kabahar said later in an emailed statement.

McGraw Hill said in the disclosure last week that the SEC is considering actions that could include anything from civil money penalties to revocation of the grader's accreditation. The so-called Wells notice is related to six commercial-mortgage bonds S&P rated in 2011.

Those deals included a $1.5 billion transaction that Citigroup Inc. and Goldman Sachs Group Inc. were forced to abandon when S&P yanked its grade after the securities were placed with investors. The credit rater dropped the rankings after discovering potential discrepancies in how it was applying its own methodology, the company said at the time.

The SEC investigation comes after a move by the New York-based ratings company to cut about a third of its staff in the commercial-mortgage division, a source with knowledge of the matter said last week.

Deutsche Bank AG, the top underwriter of U.S. commercial-mortgage bonds, is leading the $1.65 billion Atlantis deal alongside Citigroup, said the sources who asked not to be identified because the discussions are private. Citigroup is also among a trio of lenders including Credit Suisse Group AG and Wells Fargo & Co. that are arranging the $1.4 billion loan for the owners of the Mall of America, sources with knowledge of that deal said last month.

Representatives of the banks declined to comment.

The bungled 2011 deal sidelined S&P in the commercial-mortgage bond market for more than a year and eroded McGraw Hill's market share for rating the debt. In the first half of 2014, S&P slipped to fifth among companies that rate CMBS from second in 2010, according to industry newsletter Commercial Mortgage Alert.